States and Lawyers Draft New Version of Letter-of-Credit Rules

The two organizations that draft changes to the Uniform Commercial Code have hammered out proposed revisions to the article governing letters of credit.

If adopted by the states, the proposal would overhaul article 5 of the code for the first time in 40 years.

The National Conference of Commissioners on Uniform State Laws, a quasipublic body composed of delegates from all 50 states, and the American Law Institute, a national association of lawyers, started working on the letter-of-credit portion since 1990.

Officials said the changes would fill many holes in the current article, especially when it comes to settling lawsuits that involve letters of credit.

Vincent Maulella, chairman of the New York-based U.S. Council on International Banking, one of several entities that helped draft the new article, said it would give judges presiding over letter-of-credit cases a better point of reference for making rulings.

"It's a vast improvement over the current code," said Dan Taylor, president of the group, which represents 370 domestic and international banks. "It includes new forms of letters of credit as well as incorporating the technologies utilized in today's electronic credits."

The group will discuss the proposal next month in Tucson, Ariz., at its annual conference.

Letters of credit are bank-issued credit enhancement instruments that guarantee payments for particular transactions. In trade finance, they are bought by importers and exporters who want assurances that delivered merchandise will be paid for.

But letter-of-credit arrangements often lead to lawsuits - for example, when two parties dispute the terms of the deal, the wrong merchandise is delivered, or accompanying documents contain errors.

Because there is no standard law to refer to when letter-of-credit arrangements are disputed, Mr. Maulella said, judges "do whatever they want" - and often base decisions on what they think the law should be.

James Byrne, a law professor with Arlington, Va.-based George Mason University and the editor of Letter of Credit Update, which is published by the International Chamber of Commerce, estimated that about 250 such lawsuits may be pending.

The revised article 5 would:

*Let banks issue letters of credit to their own accounts.

*Eliminate "perpetual letters of credit," which have no expiration dates.

*Relax formalities for paperless letters of credit.

*Provide for a reasonable period of time - up to seven business days - to examine presented documents.

*Require that attorneys' fees be awarded to the prevailing party in litigation.

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